4a Equity Release

Equity Release schemes are designed for homeowners to take advantage of equity they have built up in their property.

Pros

  • They are of benefit to older people on low incomes, who have significant equity in their home, and wish to use some of this to enhance their lifestyle
  • The schemes enable them to stay in the house long term (usually until death)
  • Avoids the disruption of selling, moving, etc.

Cons

  • They can be expensive –the actual amount you pay is not known until you die (or go into care) and the house is sold
  • You will pay fees to arrange the scheme. These vary, but are usually over £1,000
  • The value of your estate will be reduced (possibly to zero, if you live for many years)
  • If you take a Home Reversion product and then need to sell the property before you die, this can be complex and expensive. If you think you might need to move before you die, e.g. to be nearer family or because you need a single storey dwelling, it is probably better to sell your house on the open market and move now
  • You may lose entitlement to means tested benefits

There are two variations – Lifetime Mortgages and Home Reversion schemes. There is a minimum age to qualify, usually 55 or 60, depending on the product taken.

All equity release providers are regulated by the FSA. Nevertheless, taking financial and legal advice is strongly recommended.

Lifetime Mortgages

Lifetime mortgages are the most common equity release product. In many ways it is just like a normal remortgage, where you continue to own the property, refinancing to release equity from your home.

You can receive a lump sum, an income, or a combination of the two. Where this differs from a normal remortgage is that you will not make monthly repayments. Instead the interest is rolled up, and repaid only when you die or go into long-term care.

How much you owe when you die will of course depend on how long you live. You should be aware that as the interest compounds the amount you owe will increase significantly over time.

To minimise the amount of interest that accrues it is usually advisable to take a drawdown product. You will have access to a set amount, but you only draw the funds as and when you need them.

You should always ensure that the product you take guarantees that you will never owe more than the property is worth (known as a “No Negative Equity Guarantee”).

Home Reversion Schemes

With home reversion schemes, you sell your home, or a share of it (e.g. 50%). As with a Lifetime Mortgage you get a lump sum, an income, or a combination of these.

When the property is sold, usually when you die, your estate only receives the percentage of the property’s value that you still own (e.g. 50%).

How much equity can be released?

This will vary depending on your age (and age of your spouse if applicable), and the value of the property. It is unusual to be able to get a Lifetime Mortgage for more than 50% of the value of the property.

With a Home Reversion scheme you sell a share of the property, which can be up to 100%. However the amount you are offered for this share will not be based on the open market value of the property, but what the Provider will offer you based on the fact that they are giving you a lifetime tenancy. It will depend to a large extent on your age – older people will get more because their life expectancy is lower.

Further Information

There is an excellent guide available from the Money Advice Service (a Government supported organisation who provide free and independent advice):

https://www.moneyadviceservice.org.uk/files/final-equity-release—november-2011.pdf

Find out more about the ways to sell a house:

1 Using an Estate Agent
Types of Estate Agent
How Estate Agents Market Property
How Much is it Worth?
How Much are Estate Agent’s Fees?
Once the Property is Listed
Once a Sale has been Agreed
Estate Agent Tricks
Selling Without an Estate Agent

2 Selling to a Quick Cash Buyer
Watch out for the Unethical

3 Selling at Auction

4a Equity Release

4b Sell & Rent Back (SARB)

5 Creative Solutions
Exchanged with Delayed Completion

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By Richard Watters

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